Viewpoint

Immigration Can Fuel U.S. Innovation—and Job Growth

Arizona may be ground zero for the conflict over U.S. immigration policy, but it takes only a few minutes of watching cable television news and scanning local op-ed pages to see how raw and divisive the matter has become in the nation's political sphere.

Yet with all the heated rhetoric about illegals, border security, amnesty, racial profiling, and other incendiary topics, one aspect of immigration isn't emphasized enough: the job-creating potential of immigrant entrepreneurs. They're the vanguard in America's global competition for entrepreneurial talent and innovative ideas. The nation needs to encourage more entrepreneurs from other nations to call America home. Their energy is the elixir of future economic growth.

Take a recent study by the McKinsey Global Institute on U.S. multinational corporations. In Growth and competitiveness in the United States: The role of its multinational companies, the consulting firm notes that big business comprises less than 1 percent all U.S. companies, yet the 2,270 multinational corporations in its database accounted for 31 percent of the growth in inflation-adjusted gross domestic product from 1990 to 2007. Even more important, U.S. multinational corporations have contributed 41 percent of gains in labor productivity since 1990—and 53 percent of the productivity increases during expansions.

The consultants highlight the role immigrants play in bolstering the competitiveness of American multinationals, especially helping the U.S. "lead the world in the number of engineers, scientists, and business professionals who are ready to work in a multinational company."

High-Tech Startups

Specifically, some of the world's brightest brains and cutting-edge innovators come to learn and create in the U.S.—and they stay. In 2007, for instance, 62 percent of foreign-born nationals who received a science or engineering doctorate remained in the U.S. for at least five years following graduation. That figure is up from 41 percent in 1992. More than 80 percent of graduates of Indian origin and 90 percent of Chinese graduates still lived in America five years after graduation, according to McKinsey. (The McKinsey study on multinationals makes for good companion reading to Intel founder Andy Grove's cover story in the July 5-11 issue of Bloomberg BusinessWeek. The Silicon Valley legend is himself an immigrant from Hungary.)

It's well-known that America's high-tech economy has prospered thanks largely to highly educated foreigners. But the degree that the nation's cutting-edge industries, from semiconductors to biotechnology, depend on immigrant scientists, engineers, and entrepreneurs to remain competitive is stunning. For example, a quarter of the engineering and technology companies started in the U.S. from 1995 to 2005 had at least one founder who was foreign-born, according to research by scholars Vivek Wadhwa, Annalee Saxenian, Ben Rissing, and Gary Gereffi. In Silicon Valley, America's epicenter of technological innovation, the percentage of immigrant-founded startups reached 52 percent of total new companies over the same period.

The scholars also calculate that foreign nationals living in the U.S. were named as inventors or co-inventors in 24 percent of all international patent applications filed in the U.S. in 2006. That's up from 7 percent in 1998. The influx of highly-skilled workers from India, Asia, Latin America, and other corners of the world is also a boon to U.S. exports.

Lake Street Revival

It isn't just highly educated foreigners who are entrepreneurs, either. Immigrants have created businesses, from the corner grocery to the local builder, that create jobs and revitalize neighborhoods throughout the country. Take Lake Street in Minneapolis. A good portion of the major urban artery had become was one of the city's most poverty-stricken, crime-ridden neighborhoods by the late 1980s and early 1990s. Storefronts were boarded up, while drug dealing, prostitution, and other crimes were all too common.

The area started to attract Latino immigrants, legal and illegal. The first Latino-owned business opened on Lake Street in 1994. Cheap rents and a growing market attracted many more Hispanic entrepreneurs. "We saw the need and the opportunity," says Ramon Leon, founder and chief executive of the Latino Economic Development Center on Lake Street. "Everybody wanted to open a business on Lake Street."

Business is doing well on Lake Street today, despite the economic downturn. The street is lined with restaurants, small grocery stores, and other classic neighborhood shops. East African entrepreneurs from Somalia and Eritrea have also opened businesses. Little wonder that cities with lots of immigrants have seen their per capita tax base go up, according to David Card, economist at the University of California, Berkeley. The competition on Lake Street is fierce enough that immigrant entrepreneurs are increasingly aware they need to expand their market beyond their ethnic communities. "If you want to be successful you need to sell stuff to others," says Ramon.

Put Out the Welcome Mat

The Obama Administration wants to start a national debate on comprehensive immigration reform. It's a sensible but daunting, politically perilous undertaking. The Bush Administration took a similar tack, and it ended badly. All the political signs point toward legislative intransigence rather than compromise. The danger is that during a period of anger and vilification of immigrants, fortified by post-9/11 fears of immigrants, America will lose out in the global war for innovative brain power and entrepreneurial hustle. It's all too easy for overseas innovators and entrepreneurs to stay home and pursue their dream there, particularly in fast-growing emerging markets with modern universities and high-tech clusters.

Yet America's historic record, blue-chip economic research, and well-established business experience all suggest the payoff from making it vastly easier for immigrants—especially educated immigrants—to stay permanently in the U.S. will be enormous. Tear down the walls that place obstacles to immigrants attending American universities and set up procedures for rapidly granting educated workers permanent resident visas.

Create a mechanism for a permanent "entrepreneurial" visa for those immigrants with a hunger to create a business and a plan for a job-generating startup. Instead of piling on more obstacles to prevent abuses of the current temporary H-1B visa system, why not streamline the whole process and eliminate many of the restrictions that make it difficult for workers to travel, change jobs, or earn a promotion?

Let's turn down the rhetoric and put out the welcome mat again.

Farrell is contributing economics editor for Bloomberg Businessweek. You can also hear him on American Public Media's nationally syndicated finance program, Marketplace Money, as well as on public radio's business program Marketplace.